I’m in Guangzhou, China for a week with my wife to check out the local property market. My wife is from Guangdong province and the majority of her family live in Guangzhou, so it makes sense for us to buy a property here as a long term investment.
Every country’s property market and associated rules are different from one another, whether it be for purchasing or renting. China is no exception, with different rules across the country, especially in the larger cities with high demand and associated high prices.
The restrictions now in place in Guangzhou, as best I can determine are as follows:
- Foreigners must have the appropriate working visa together with evidence of tax payments over at least one year.
- Chinese families (singles over 18 are a family) with Guangzhou as their hukou (household registration area) or families living in Guangzhou with proof of one year’s tax payments can purchase one more property.
- Chinese families who do not fit into the previous category can not purchase any more property.
- When purchasing a second property the deposit can not be less than 50% and the interest rate not lower than 1.1 times the basic rate.
- When purchasing a third property no mortgage is available.
- If using a government housing loan to buy a property of less than 90 sqm then the deposit must be at least 20%. If the property is more than 90 sqm then the deposit must be at least 30%.
In Guangzhou these recent rule changes have had a big impact on transaction volumes. The best example to reflect this was from a lady at the local government agency that performs the registration of property transactions and ownership. She said that buyers, sellers and their agents used to start queueing up at 2 am to ensure that they were able to process the paperwork that day! However, in order to sell my wife’s property, we were able to process the paperwork without much trouble. I would go so far as to say that for a government centre the queues were short and the crowd quite small.
Backing up this story is a bank’s property report showing the transaction volume from February 28 – March 6, 2011 was down 34% compared to the 2010 weekly average.
People with more than two properties are very reluctant to sell a property now, as they will not be able to purchase another. It will be interesting to see if this will cause the availability of properties to dry up, or if the demand was purely speculative with a small percentage of the population trading property like a commodity. At the moment it’s far too early to tell, but another 4-6 months should show the full impact of the new restrictions. Some people say the demand is there because there is simply no where else to invest apart from the “riskier” stock market.
We looked at a few properties over the last few days, from second hand units over 15 years old to brand new units still under construction. Some complexes were right in the centre of Guangzhou, while others were in the outer city areas and one in a different city towards Macau. The property companies provide free buses to entice people to visit their developments that might be a bit further out of the city, away from a train line, or in another city completely.
Something that was glaringly obvious to me, but the locals seem ambivalent about, is the general poor quality of building maintenance. It seems that once a property is more than 5 years old that the appearance will deteriorate rapidly. The locals seem to just accept that this is quite normal and from what I can understand they don’t want to spend the money on fixing things either. The maintenance costs averaged about ¥2.80 psm, but one older property was ¥8.60 psm, yet I couldn’t see where the money was going!
Quite a few (>50%) of the 2nd hand properties we saw were hardly in what I would call sellable condition. Some examples are: wallpaper hanging off the walls, bathrooms with bad mould problems, kitchen cabinets with missing doors, dirt and dust all over the place, badly marked walls, etc. Again, this seemed quite normal to the real estate agents. I didn’t take photos of these defects, as I thought I might offend the owners.
An interesting point, only pertaining to new properties, is that you have to get a loan and start paying the full mortgage repayments within a month or two of purchase, irrespective of the construction phase or final completion date. For one property that we both liked that would mean 1.5 years of mortgage payments before we even got the keys! With property prices already quite high and the government placing more restrictions on property transactions there seems little chance of capital appreciation. Therefore, this method of purchase didn’t make sense to me, as the deposit would be tied up in a property that cannot be used as our family home nor generate any rental income.
Putting the nail in the coffin was the average gross rental yield of <3%. With such low rental rates it just doesn’t make sense to buy property in Guangzhou. We decided that if we needed to live in Guangzhou we would be able to rent a reasonable, centrally located, 3-bedroom apartment for around ¥5,000 – ¥6,000 per month.
After concluding that we would not be purchasing a property at this time we were wondering what to do with the money from the sale of my wife’s property. Returning from a day of property viewing we happened to walk past a branch of Singapore’s DBS bank and noticed an advertisement in the window for an AUD$ deposit rate of 6.90%. That’s a bit better than the rental yield in Guangzhou and with Aussie house prices falling it could be the deposit for a property down under!